Location, location, location. It’s not just hoteliers and real estate agents who harp on this as the most important aspect of their business. Retailers, too, say much the same thing.Pick the right location for a store, and half the battle is won. Or is it?
The fact is, choosing the right location for a store is an art and science in itself. And as you go deeper into the other aspects of the retail business, you realise that location is not the only thing that a retailer needs to get right. Other components include understanding areas such as consumer trends, spending patterns, population density, competition, supply chain, and above all coming to terms with an operations-intensive business. And in India, this is just half the story.
Consider the country’s demographic spread across a very complex terrain. Their needs are catered to by 11 million neighbourhood stores. The Indian consumer is not just aspirational but discerning as well. From a larger business point of view, retail is all about low margins and that is the single, biggest challenge to overcome.
Standing tall in this extremely complex story is Radhakishan Damani, one of India’s most astute investors and his Avenue Supermarts, which owns the DMart hypermarket chain of stores, and is at No. 18 on the BT500 list for 2022. Since the time the company rolled out its first store in Mumbai’s Powai area in 2002, its footprint has grown to 302 outlets across 18 cities. It had 131 stores at the end of FY17. With a model that is unique, effective and relentless on execution, the company is the toast of its investors—Avenue Supermarts saw its average market capitalisation surge nearly 40 per cent in the BT500 study period (October 2021 to September 2022). Paradoxically, for the price-conscious Indian consumer, DMart is a high-quality value proposition—very few, if any, of its peers offer better discounts.
In many ways, identifying the right model and then pursuing it with a long-term approach is what distinguishes a successful retailer from one who struggles.
Abhijeet Kundu, Senior Vice President of Research at Antique Stock Broking, points out that DMart followed the Walmart model by owning real estate. There is a clear logic in this approach. The thumb rule is that rental costs should account for around 3 per cent of a retailer’s turnover. And with most efficient retailers operating at an Ebitda margin of 3-4 per cent, the ability to control costs becomes extremely critical. By owning its real estate, DMart is able to deliver higher Ebitda margins since what is saved in rentals goes straight to the bottom line.
The emergence of organised retail in India around two decades ago saw many new entrants, with Big Bazaar and Subhiksha being the prominent ones. Take the case of Kishore Biyani-led Big Bazaar, whose rental model involved a lower-capex (money was largely spent on furniture and fixtures) outgo, with all the focus on retailing. Working capital was deployed to maintain inventory, and in every sense, it was an asset-light model. The low-profile Damani, meanwhile, understood real estate and acquired land in locations where it was affordable and at an early stage of urban development. At the core of his audience is the quintessential Indian middle class, a population that is large, aspirational and tremendously smart. “DMart is basically a large grocery retailer. Like a kirana outlet, it owns the land, works on high volumes and low margins,” explains Kundu. The capex for land acquisition is amortised over time and the tack is to spend less on the store and more on providing value to the consumer. “For that to work, their costs have to be very low,” he adds. The management of Avenue Supermarts declined to take part in this story.
A bigger bite
It is worthwhile to take note of DMart’s revenue pie. A report by Centrum Broking, after the company’s second quarter results, shows that 55 per cent of its revenue comes from general merchandise and apparel; 20.5 per cent from non-foods FMCG and the balance 24.5 per cent from foods FMCG. Interestingly, this segmental break-up has hardly changed since FY17.
According to Akhil Parekh, Analyst at Centrum Broking, DMart has the potential to have anywhere between 1,500 and 1,600 stores based on the current consumption pattern and growth of organised retail in India. “India’s retail industry was pegged at $800 billion in FY20, of which around 60 per cent is grocery. India’s organised grocery retail is at best 4-5 per cent of the total grocery market. DMart’s share in that is around 15 per cent, while at an overall retail level, it is at just 1 per cent.”
Grocery as a category has to turn fast in the hypermarket format—which in business terms means that existing stock has to make way for new ones at a faster rate. As a large part of the grocery segment is food, it runs the risk of perishing sooner, which makes it vital that they fly off the shelves even faster. For that to happen, it has to be very competitively priced since margins are already wafer-thin.
This shortfall is then made up by other categories like utensils or anything else that is not branded, like buckets, brooms, etc. Here, the retailer has pricing power with gross margins easily getting past
And that helps the DMart model. It is well-known in retail circles that the mandate for most DMart store managers is clear: keep operating costs low and offer the lowest price in that area to ensure that the customers keep coming back.
Varun Singh, Lead Analyst of FMCG and Retail at IDBI Capital Markets, emphasises DMart’s ability to offer high discounts. “They are very good at squeezing out the most from rentals and employee costs. Both together account for about half of a retailer’s gross profit. Besides, the cluster-based approach allows them to create warehousing capacity, which reduces the cost incurred to move the goods and also cuts back on time,” he adds. This is where the competition finds it impossible to match them, says Singh.
Centrum’s Parekh, too, appreciates DMart’s cluster-based approach for store expansion to grab a disproportionate share of the consumer’s wallet. “In the process of opening new stores, the company takes into account key factors like population density, customer and vehicular traffic, customer accessibility, potential growth of local population and economy, and the potential to develop an area [into a market],” he explains.
In the midst of all this, DMart’s stores—each with an area of at least 35,000 sq. ft, and in some cases, beyond 50,000 sq. ft—have a layout that has ease of shopping and the feel of a large kirana store at its centre. “Tamil Nadu, Maharashtra, Karnataka and Gujarat are the top four states in terms of per capita retail spend. It is no wonder then that 65 per cent of DMart’s stores are in these states,” says Parekh. Kundu adds that there is no real need for DMart to be a pan-India player.
Speaking of competition, the one that comes to mind is the unlisted Reliance Retail. Parekh points out that when Reliance Industries partially sold a stake in its retail business to private equity funds in late 2020, it was valued at nearly Rs 4.2 lakh crore or an approximate valuation multiple of 45 times (45x EV/Ebitda) on a one-year forward basis. Meanwhile the estimated valuation multiple for DMart on the basis of FY23 prices is at around 75 times (75x EV/Ebitda). “Strong execution capabilities, right allocation of capital, long-term thinking while building the business, and a huge opportunity in terms of size are probably some of the key reasons for DMart’s high multiples,” he says.
As customers get even more comfortable with technology, e-commerce will become an inevitable reality for retailers. And DMart has made a move on that in its own way with DMart Ready, where you can pick up your order at designated points after ordering online or ask for paid delivery. The management has been cautious on expanding delivery and currently operates it in 18 cities from 12 in Q1FY23. Over 90 per cent of DMart’s online sales come from Mumbai, Pune, Bengaluru, Hyderabad and Ahmedabad. Like in the hypermarket format, there is room for growth in this segment as well.
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